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Monetary Policy and Asset Prices: A Markov‐Switching DSGE Approach
Author(s) -
Hur Joonyoung
Publication year - 2017
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2560
Subject(s) - economics , dynamic stochastic general equilibrium , monetary policy , counterfactual thinking , monetary economics , stock market , stock (firearms) , markov chain , volatility (finance) , econometrics , paleontology , philosophy , epistemology , horse , machine learning , computer science , biology , mechanical engineering , engineering
Summary This paper estimates a Markov‐switching dynamic stochastic general equilibrium model by incorporating stock prices in monetary policy rules in order to identify the Federal Reserve's stance toward them. Based on the data from 1984:Q1 to 2009:Q2, I find that historical evidence of the policy reaction toward stock prices is weak except for the stock market bubble of the 1990s. A counterfactual exercise shows that the rapid growth in stock prices during that period would have been significantly higher if monetary policy had been independent of the stock market. However, unconditional macroeconomic volatility increases with the degree of policy responsiveness toward stock prices. Copyright © 2017 John Wiley & Sons, Ltd.